What makes up the price of a litre of petrol?
The cost of filling the average car with fuel is falling, but is still approaching £100. How is that made up? Saloni Sardana explains just what makes up the price of a litre of petrol.
That’s driving petrol prices back up – the cost of filling an average family car now costs around £90, or £1.64 per litre.
An analysis by AA found that if sterling had maintained its February exchange rate of about $1.35, instead of falling to Friday’s level of $1.11, a 55-litre tank would be at least £6 cheaper to fill.
Why is sterling’s crash leading to lower petrol prices?
Petrol prices are rising in the UK because it costs more to import oil.
Petrol is made from crude oil, which is quoted in dollars. If either the dollar strengthens or the pound weakens, oil becomes more expensive in pounds.
As Sarah Coles, senior personal finance analyst at Hargreaves Lansdown, points out: “There’s every chance that a falling pound will make life more expensive. Overnight the price of anything that’s listed in dollars – including oil – will cost more when you’re paying in pounds.”
“It means that despite the fall in the global oil price, we’re not likely to feel the benefit at petrol pumps in the UK”, she added.
Petrol prices had surged earlier in the year due to the post-Covid-19 effect and Russia’s invasion of Ukraine. But fears of a recession and a fall in demand had caused oil prices to soften which was easing the pressure at UK forecourts.
But sterling’s sharp depreciation means prices at UK forecourts will be shrugging off falls in global oil prices.
“The influence of the exchange rate is often overlooked when drivers compare oil price movements with those at the pump. At the moment, it is critical. Oil and fuel on commodity markets are traded in dollars, which makes the weaker pound very bad news for motorists,” AA’s fuel price spokesperson said.
Chancellor Kwasi Kwarteng did not cut fuel duty in the mini-Budget as many motorists might have hoped.
Why was the price of petrol price at a record high earlier this year?
Fuel prices crashed in 2020 as Covid-19 meant demand for energy plunged. But demand for oil has returned with a vengeance after restrictions were lifted.
Russia’s war with Ukraine has merely added fuel to the fire. Oil prices rose to more than $124 a barrel after the EU announced sanctions against Russia, including banning most of its oil imports.
This scarcity triggered a sharp rise in petrol prices at the start of July.
While the UK is not as reliant on Russia for natural gas, Europe is heavily reliant and its decision to ban Russian oil resulted in a spike in prices for oil even for those countries that did not rely on Russia for supply.
A breakdown of petrol costs
The pump price of petrol is made up of six components: fuel duty, cost of petrol, VAT, retailer profit and delivery & distribution.
• Fuel duty
Fuel duty, which is now set at 52.95p a litre, represents roughly 32% of a litre of petrol.
• Wholesale costs
The cost of wholesale petrol to the supplier is the second biggest component – accounting for roughly 33% – and is based on the price of raw materials including crude oil and refining costs. Petrol prices move in line with oil prices which can be very volatile.
VAT represents about 17% of the price of a litre of petrol. As the price of fuel goes up, the amount of VAT you pay goes up, too.
• Retailer Profit
The amount retailers receive from the sale of every litre is around 11%, says the RAC.
• Delivery and distribution
The cost of distributing and transporting the fuel is done by the wholesaler and represents 1% of the total cost.
• Biofuel content
The RAC also mentions E10 fuels – which is made up of 90% regular unleaded petrol and 10% ethanol. The RAC says the biofuel element makes up for 6% of the cost of one litre of petrol.